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In most situations, you will not become personally liable for the debts of a limited company. A limited company is classed as a separate entity to the directors/shareholders who are associated with it. If you are a director, you can be held liable if you have signed personal guarantees or operated a business which does not have the protection of limited liability, such as a traditional partnership.
What is a liability
In terms of business, liability refers to a debt for which your company is responsible. This could come in the form of, say, a loan, asset finance, unpaid invoices, accumulated tax or rent falling due. In the case of a limited company which is unable to meet its liabilities, as director you have the protection of limited liability.
Effectively this means that directors generally cannot be held personally responsible for the debts of a limited company, unless they have signed personal guarantees.
Can company debts be written off?
If a company is insolvent and can no longer trade, it may enter a creditors voluntary liquidation, which would see the company closed down and the assets sold. The funds raised from the sale will be used to pay for the liquidation process, and any funds left over will be distributed equally amongst the creditors. Any remaining unsecured company debt is then written off.
When can a director be held liable for company debts?
Although a limited company’s liabilities are its own and don’t attach to the director, there are certain circumstances where a director may be held responsible. The most common normally comes in the form of personal guarantees. If you have signed a personal guarantee, you will be liable for the debt if the company cannot meet its obligations.
If, as director, you have allowed the company to continue to trade when it was insolvent or have failed in your duties as director you may lose the protection of limited liability and could be held liable for some company debts.
If you have borrowed money from the company which has not been repaid and as a result you have an “overdrawn” director’s loan account, then a liquidator could pursue you to recover the amount.
What are the consequences of being liable for company debt?
If as a director you are found to be liable for company debts, then just like any personal debts you will be responsible for their repayment.
If you are unable to repay these liabilities, then you may have to consider selling or refinancing assets. And if this is not an option, creditors may force you into bankruptcy. Indeed, after taking advice you may decide to declare yourself bankrupt as a way of dealing with the situation.
In some cases, if you are found to be liable as a consequence of not fulfilling your duties as a director, you may be disqualified and barred from being a director for up to 15 years.
Are there any other options to deal with the debts?
Depending of the scale of the debts involved and your personal financial situation, there are options available. As mentioned above options could include refinancing or bankruptcy. Alternatively, a formal insolvency procedures such as an individual voluntary arrangement may work or a Debt Management Plan can be a viable solution for smaller amounts of debt.
If entitled to redundancy pay from the liquidated company as a director and former employee, you can use that to cover some personal debt. However, redundancy pay is only available if there has been a regular salary going through the PAYE system and the business has been incorporated for at least two years. The amount which can be claimed is dependent on age, length of service and salary earned.
Are you a sole trader?
If you work as a sole trader, you do not have the protection of limited liability. There is no legal difference between business debt and personal debt. You are responsible for all liabilities. Unlike a limited company, any business debts are yours personally. There are options available to help you if you run into financial difficulty but they differ to insolvency procedures for limited companies.
Company debts are a separate entities from your personal debts, so when a company goes through the process of a liquidation you would not usually be held personally liable. However, as outlined above there are instances when you as a director would be held personally liable. In those situations, liabilities which emerge as a result, may push you into personal insolvency.
How we can help
If you are looking to close your company and are worried about being liable for your company’s debts, we can help guide you on the best way forward and let you know what you could be liable for. With eight licensed insolvency practitioners, we have all the expertise and experience to help guide you through what can be a tricky situation.